The pandemic era of cheap money, which has set inflation around the world for many years, is definitely over. The latest minutes from the US Federal Reserve confirm that interest rates in the United States will rise significantly this year.
And because the United States is the world’s largest economy, every step it takes has an immediate impact on global markets. In addition, the Fed intends to get rid of the securities it holds – about twice as fast as when it last took a similar step.
The pace of the so-called reduction of the Fed’s balance sheet can be up to $ 95 billion a month. The US Federal Reserve wants to gradually cut off so many government bonds or mortgage-backed securities from its holdings. And as it follows from minutes of the March meeting Fed published on April 6, there was general agreement on this pace.
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In an effort to protect the US economy from the effects of the pandemic, the Fed bought on the bond market on a large scale and its balance sheet rose from $ 3.8 trillion (spring 2020 value) to 8.5 trillion. This period of so-called quantitative easing will now be replaced by a period of quantitative tightening.
The last similar cycle took place between 2017 and 2019, during which the Fed divested $ 50 billion worth of bonds a month. The current tightening will take place at almost double the pace.
The Fed’s Open Market Operations Committee (FOMC) is expected to approve a balance sheet cut at its next meeting on May 3-4. The reason is high inflation, which climbed to 7.9 percent in the US in February – the most since 1982.
The Fed raised its key interest rate by a quarter of a percentage point in mid-March. He made the increase for the first time since 2018, and a record from the March meeting showed that the bankers were more in favor of a double lift, but abandoned it due to the Russian attack on Ukraine.
However, the next increase is expected to be half a percentage point and the Fed has indicated that there will be six this year.
As poznamenal server Axiosthe record of the meeting dispels all remaining doubts about the faster tightening of the screws than before. According to Bloomberg Investors believe it will be the most aggressive in three decades. The combination of rate hikes, which will make bank financing more expensive for companies, and the end of support for the economy through government bond purchases has sent major US stock indices down.
The Dow Jones index, which includes shares of the top 30 US companies, fell 0.42 percent on Wednesday and the broader S&P 500 fell 0.97 percent. The Nasdaq Composite Index, which includes many companies in the technology sector, fell 2.22 percent.
The stock sell-off continued on the second day, as already on Tuesday the Fed’s procedure was indicated by the statements of some representatives of the American central bank. Her Vice-President Lael Brainard stated for CNBCthat it is “extremely important to bring down inflation”. And her words were later confirmed by Mary Daly, head of the Fed’s San Francisco division. “We need to make sure you don’t worry that prices will be much higher tomorrow when you go to bed.” she let herself be heard.
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